By Liang (Leon) Xu, H. Zhao📧, and Nicholas C. Petruzzi
In Manufacturing & Service Operations Management, 2021, 23 (1): 170–190. https://doi.org/10.1287/msom.2019.0822
Problem definition: In 1992, the Food and Drug Administration (FDA) instituted the accelerated approval pathway (AP) to allow promising drugs to enter the market based on limited evidence of efficacy, thereby permitting manufacturers to verify true clinical benefits through postmarket studies. However, most postmarket studies have not been completed as promised. We address this noncompliance problem. Academic/practical relevance: The prevalence of this noncompliance problem poses considerable public health risk, thus compromising the original purpose of a well-intentioned AP initiative. We provide an internally consistent and implementable solution to the problem through a comprehensive analysis of the myriad complicating factors and trade-offs facing the FDA. Methodology: We adopt a Stackelberg framework in which the regulator, which cannot observe the manufacturer’s private cost information or level of effort, leads by imposing a postmarket study deadline. The profit-maximizing manufacturer then follows by establishing its level of effort to invest in its postmarket study. In establishing its deadline, the regulator optimizes the trade-off between providing public access to potentially effective drugs and mitigating public health risks from ineffective drugs. Results: We develop a deadline-dependent user fee menu as a screening mechanism that establishes an incentive for manufacturer compliance. We show that its effectiveness in inducing compliance depends fundamentally on the enforceability of sanction, a drug-specific measure that indicates how difficult it is to withdraw an unproven drug from the market, and the drug’s success probability: The higher either is, the higher is the probability that the mechanism induces compliance. Managerial implications: We synthesize and distill the salient trade-offs and nuances facing the FDA’s noncompliance problem and provide an implementable solution. We quantify the value of the solution as a function of a drug’s success probability and enforceability. From a public policy perspective, we provide guidance for the FDA to increase the viability and effectiveness of AP.
Keywords: Health public policy; Drug approval policy; Pharmaceutical industry; Asymmetric information; Moral hazard